Scott Bessent is "called" a bean farmer but is nothing of the sort.
He worked at Brown Harriman and Soros fund, when things were serious. He was a young trader at Soros' when that fund attacked the pound sterling exchange rate against the newly formed Euro (and won). Scott Bessent is many many things but he is not stupid… and then he does something incredibly stupid. He bets against the bond market!
There is no doubt that Scott's descent into hell was at the prompting of his boss, the American President, another deluded idiot. Scott's first announcement was that he was pledging tens of billions of dollars to defend bond prices (i.e. lower interest rates). Now to be clear, 10 billion is about five minutes of trading in the international bond market.
Anyway that's not the real drama, the real drama is that for the past 20 years two buyers have accounted for nearly ⅓ of all new international issuances (the international bond market accounts for about 30% of all US sovereign bonds sold). The problem is that China has not been buying US treasuries (the Chinese banks are but for different reasons). Still China is now a minor player in the US bond auctions, it was a dominant player until 20 months ago (domestic and international reasons), the second buyer was Japan, but there too the appetite has reduced, mainly because of domestic reasons (aka the massive 220% debt to GDP ratio). Domestic interest rates have risen from near zero to around 3%. This has led to the unwinding of the 30 year old carry trade (sell Japanese bonds and buy US treasury – and make money on the difference– with leverage).
In addition, the current administration has made few if any friends, some will say that the current administration has gone out of its way to make enemies. Plus with no pushback from the Republicans in Congress, the administration has gone on a wild spending binge, where the current deficit has exploded with new debt for 2026 of nearly six trillion dollars – in addition to the nearly 10 trillion that has to be refinanced this year… In short, a big problem.
The big buyers of US debt are the Brits, the Canadians (go figure) and the sellers have been most of the European Union (aside from Norway – which is not in the EU) and Japan and China. The overall impact is that Bessant's game of chicken could only go one way, lower bond prices (i.e. higher interest rates).
The world has been there before, aside for one thing, the entire interest rate curve has shifted upwards, this is a first in nearly 25 years. In the past (aka after the pandemic) the short end of the curve was steep but not the long term end. The impact is that 30 year interest rate mortgages, which is the standard for US mortgages, has risen from about 5.5% two years ago to 7.5% today.
Now, Bessant can pick a fight with the bond market, and everyone knows the outcome, and someone like Bessant should be more aware than most considering that his first profitable trade ever was to be that the market was right and the government was wrong (the Pound thing). My suspicion is that this is Bessant's exit strategy from the administration. Sooner rather than later he's gonna get fired by the American President.
Note: so that we are clear all those who picked a fight with the bond market – lost! Also between 1945 and 1951 the US government monetized its debt. By 1951 US interest rates had exploded – printing cash is not a solution. However, it could be good enough until the end of the current administration's term in office (it would be a fitting outcome for one of the most disastrous administration the US – and the world, has seen in a very long time)
Comments